India: An Emerging Market Opportunity

“The progress of India is the destiny of one-sixth of humanity. And it will also mean a world more confident of its prosperity and more secure about its future.” – Narendra Modi, Prime Minister of India

A brilliant value investor and Rhodes Scholar, Sir John Templeton (1912-2008), was one of the earliest and most successful international money managers. Starting his mutual fund in 1954, Templeton sought out value investment opportunities throughout the world at a time when there were few competitors and sparse analyses of businesses.

Templeton’s extensive research and intellectual acumen met with great success. His research was accomplished without the aid of computers or modern technology. With the use of today’s tools, it takes just minutes to investigate and compile statistics from publicly-available sources. In the past, it would have taken an individual days or weeks of ongoing research. This instant access to information makes it harder for money managers to exploit perceived mispricing in the market. Due to these significant technological shifts, more sophisticated strategies are now required in order to achieve exceptional investment returns. Fundamental research disciplines of the past may still be employed in conjunction with more macroeconomic data – the movement of currencies, exchange rates, central bank policies, GDP growth rates, and a plethora of other relevant data.

What countries are positioned to make a splash in the near future? With the world’s second largest population, India has begun to distinguish itself from other emerging market economies. Over the past decade, and specifically after the 2014 election of Prime Minister Modi, the nation has been rapidly transforming. As a former colony-turned-democratic republic, India has chosen to maintain the British-style rule of law, creating a strong regulatory environment through the Reserve Bank of India. The democratic republic structure and widespread embrace of capitalism have greatly aided the development of the country. Modi is implementing strong policy changes such as tax simplification, improved labor laws, bureaucratic as well as bankruptcy reform.

With more than 1.3 billion people and an average age of 29-30, India is poised to be the largest global contributor to the working-class population over the next decade (Chart 1). Additionally, the middle class is now some 300 million and growing rapidly. The nation is witnessing increasing consumer demand, urbanization, productivity growth and infrastructure development. Opportunities abound!

Global companies such as Nike utilize the manufacturing facilities and abundant low-cost labor in India to produce their products. Though many industries have taken advantage of the sheer manpower available in India, the pharmaceutical industry has especially benefited. Indian firms now receive about 40 percent of new U.S. approvals for generic drugs1. Domestic businesses offer investors the unique opportunity to participate in this growth sector and several other industries also show potential in this rapidly growing region. Investing in these domestic companies is where future wealth-creating potential can be found.

Education has become a national priority. The Indian Institute of Technology is regarded as one of the top technology institutes in the world. Rejected applicants apply to MIT, Princeton, and other renowned universities. Given a 1.3-billion population, the intellectual talent pool is abundant.

Over the past 25 years, the Indian economy has made great progress. The stock market has matured into a more sophisticated business, giving foreign investors more comfort and assurance in their order executions and custodial functions. Investors may invest in and hold Indian companies with confidence.

As with all emerging markets, investing in India is subject to certain risks. Over recent years, the strong U.S. dollar has been a negative for emerging market investors. The declining dollar in the past few months, however, is encouraging investing in the emerging markets. The potential increase in U.S. interest rates remains a concern. It appears the Fed will attempt to keep U.S. interest rates relatively low in the foreseeable future, although minor increases are expected. A slowdown in the Chinese economy, additionally, could impact exports as would a devaluation of the Chinese yuan, which would also likely cause other emerging markets to devaluate their currencies in order to stay competitive.

On a valuation basis, Indian businesses remain attractive. Valuations such as price-to-book, price-to-EBITDA (earnings before interest, taxes, depreciation and amortization) and other analytical measures appear to be inexpensive relative to the developed markets valuation measures.

From 1996 to 2017, the average GDP growth rate in India was just 1.5%. As national reforms continue to be implemented, the probability of a higher GDP growth rate is likely. One meaningful measure of this hypothesis is the rate of labor productivity growth. From 2009-2015, such productivity growth averaged over 5.5%, the highest in the 13 most significant emerging market countries (Chart 2).

The significant economic and political reforms taking place in India, a large and growing pool of workers, higher productivity growth, increased emphasis on education, sophisticated technological advances, and compelling valuations make the outlook for investing in India attractive.

Although it is difficult to make predictions about the future, India appears to have the potential as an emerging market opportunity.